The FCA is considering banning exit fees – which, on balance, is good for consumers and a positive step for the platform market. But as recent parliamentary shenanigans have shown us, ‘nothing is agreed until everything is agreed’.
The FCA has been clearer in its language than we expected. “We propose to restrict exit fees by taking forward a cap or a ban.”
Industry reaction has been largely positive to this proposal and we also support the regulator’s decision. It will be interesting to see how compelling the arguments are against a ban in the now open consultation. Platforms and firms offering a comparable service (as set out in section 4.16 of CP19/12) have until June 2019 to make their voices heard.
However, implementing a ban or a cap on exit fees could present some practical problems. One difficulty is that a fair level for a cap would be difficult to set. Some lower-cost platforms keep their headline rates down by charging explicitly for transactions, transfers and other ‘events’. This is transparent and can represent better value than an all-in-one charge.
An outright ban could also ignore platforms’ real costs, as highlighted by one platform head: “It is not offensive to charge for work. Moving assets to a different platform involves some work and some are a lot more burdensome than others.”
A possible solution could be STAR. This initiative creates standards for transfers, and the FCA thinks it could be an effective vehicle of self-regulation. It is in the early stages of membership recruitment and will be boosted by the threat of more onerous alternatives if it isn’t widely supported and successful in its aims.
Meanwhile, advisers will need to look at how they choose platforms and whether their decisions are demonstrably for the benefit of their clients rather than themselves.
Overall, the industry was already expecting changes around exit fees and the final report is no bombshell. “It’s a zero-sum game,” according to Magnus Wheatley, MD of Charles Stanley Direct. Firms offering the most attractive services will benefit from freedom of movement for investors.
Several platforms dropped exit fees when RDR came in and they seemed likely to disappear of their own accord. That didn’t happen so the FCA may have another go now. Little by little, investors are becoming more able to shop around and this will increase competition. A tick for the FCA, good news for consumers and no great worry for platforms.
Here’s a quick summary of the final report:
Change is afoot
The FCA is worried about the barriers to investors transferring assets between platforms and is proposing major changes to the rules on exit fees and the treatment of different share classes.
- Exit fees: Exit fees can be a significant deterrent to investors switching platforms and so reduce competition in the view of the FCA. The regulator will consult afresh about whether to ban exit fees outright or put a cap on them – their preference is a ban.
- Unit class conversion: The FCA thinks that different share classes on different platforms set up barriers to in-specie transfers. The regulator will consult on new rules. Possible changes could include forcing ceding platforms to convert holdings into share classes that the receiving platform can readily accept. They might also require receiving platforms to convert shares or units into discounted share classes if they are available.
Issues on the FCA agenda – for later
The FCA has a list of related concerns that it’s worried about – but won’t be acting on just yet. The regulator has indicated that progress has already been made, but their proposed timetable for further review is:
- Switching processes: later in 2019.
- Model portfolios and the relationship between advice and discretionary management: in the upcoming RDR/FAMR review.
- Disclosure of interest rates and charges paid on cash: 2020/21.
- Disclosure of charges and the ease of comparing platforms: 2020/21.
No further action
The FCA is taking no further action on orphan clients, potential conflicts of interest and commercial relationships.
- Orphan clients: Proposed measures on the governance of orphan clients have been shelved, with the FCA deciding that these clients are generally well-supported by platforms. The onus is on advisers to tell the platform when they are no longer advising a client.
- Conflicts of interest: Most services offered by platforms provide consumers with some direct or indirect benefit. The FCA has directed advisers to the rules on inducements in COBS 2.3.
- Commercial relationships: The FCA is in favour of platforms negotiating fund discounts because they ultimately benefit end consumers. The FCA has identified various practices by platforms that influence fund prices on competitor platforms and has reminded platform provides to ensure that their arrangements comply with competition law.